Commodities: Top sector preferences

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
16 November 2020, 2:25 PM
Sectors Covered:
Mining, Energy

  • Below is a summary of our view on major commodities and top picks for each.
  • Given our macro view on sector rotation into cyclicals, and supported by our view on US dollar weakness in 2021, now appears a good time to invest in resources.
  • We see the largest upside in oil & gas and coal, on a valuation basis and commodity potential at this point in their respective cycles. We are neutral on iron ore, domgas and zinc. While we are bearish on aluminium.
  • BHP remains our top preference of the ‘big 2’ miners.

Top resources picks

We share our top picks for the major commodities below.

  • "Conservative Exposure" refers to risk-averse investors who are seeking exposure to that commodity.
  • "Key Exposure" refers to our choice of the best/most relevant overall exposure.

Iron Ore

High end of the cycle prices, demand fundamentals remain healthy (stimulus supported) although recovering supply should see benchmark prices ease back.

  • Conservative exposure: BHP Limited (ASX:BHP) 
  • Key exposure: Fortescue Metals Group (ASX:FMG)

Coal - HCC

Chinese restrictions on Australian volumes have seen met coal prices re-test their lows. Depressed prices are seeing a supply response that is setting up the next price cycle.

  • Conservative exposure: BHP Limited (ASX:BHP)
  • Key exposure: Coronado Global Resources Inc (ASX:CRN)

Oil - Brent

With 60% of global oil demand coming from transportation, oil has been hit hard by Covid. Supply remains in a capex Ice Age and won't keep pace with recovering demand. We are bullish oil.

  • Conservative exposure: Santos Ltd (ASX:STO)
  • Key exposure: Karoon Energy Ltd (ASX:KAR)

Gas - Domgas

East coast gas prices have stabilised in recent months, with the re-opening of several states from Covid restrictions supporting recovering demand. We expect strong upside for gas from 2023.

  • Conservative exposure: Beach Energy Ltd (ASX:BPT)
  • Key exposure: Senex Energy Ltd (ASX:SXY)

Gold

Gold has enjoyed a powerful tailwind of safehaven buying through 2020. And while that may ease we expect sustained USD weakness will continue to support the yellow metal.

  • Conservative exposure: Evolution Mining Ltd (ASX:EVN)
  • Key exposure: Ramelius Resources Limited (ASX:RMS)

Aluminium 

Some signs of life in automotive manufacturing have helped the aluminium price off its lows but this remains a well-supplied metal where China dominates both demand and supply.

  • Conservative exposure: Rio Tinto Limited (ASX:RIO)
  • Key exposure: South32 Ltd (ASX:S32)

Copper

Beneficiary of improved global/China manufacturing in H2'2020 which has seen copper back to pre-Covid levels. Longer term we see constrained supply and electrification as major drivers.

  • Conservative exposure: OZ Minerals Limited (ASX:OZL)
  • Key exposure: OZ Minerals Limited (ASX:OZL)

Nickel 

Nickel price is back at healthy levels thanks to recovering stainless steel demand, which could moderate in the short term. But we see nickel as a major winner from the EV/battery 'mega trend'.

  • Conservative exposure: IGO Ltd (ASX:IGO)
  • Key exposure: Panoramic Resources Ltd (ASX:PAN)

Zinc

Demand for galvanised steel and alloys has also enjoyed a nice bump in recent months supporting zinc prices. Easing demand pressure is likely to see zinc prices drift but stay healthy.

  • Conservative exposure: South32 Ltd (ASX:S32)
  • Key exposure: South32 Ltd (ASX:S32)

Find out more

Morgans clients can access my full report: "Commodities: Top sector preferences" by logging into the client website. Alternatively you can browse further analysis in the research section of the site.

Browse latest research

Need access to our research?

You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team. Please contact your Morgans adviser or nearest Morgans office for further assistance.

Create trial account  Find local branch

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

  • Print this page
  • Copy Link